A Deal Is Done

7 Dec 2018; 

It is December and another OPEC production cut is around the corner.  The latest reports from Vienna indicate that the delegates of OPEC and non-OPEC reached an agreement to cut a combined 1.2 million barrels per day (b/d), with OPEC cutting 800,000 b/d and non-OPEC 400,000 b/d.  Iran seems to be exempt from making cuts.  The production cut will start January 2019 and will use October 2018 output levels as baseline.  There was a lot more uncertainty this time around because the various producers are in very different situations, politically as well as economically.  Iran is facing U.S. sanctions, Qatar is leaving the cartel and Venezuela’s production continues to struggle.  While Russia is “OK” with an oil price of $60/barrel, some of the OPEC producers (including Saudi Arabia) need prices in the $80/barrel range to balance their budget.  Brent prices, which are around $62-63/barrel at the moment, were as high as $85/barrel only two months ago, when fears about the impact of the Iranian sanctions on global oil balances peaked.  Against the backdrop of this uncertainty (or maybe because of it), the tanker market is holding up fairly well.  However, a significant cut in exports will test the strength of the market in the coming months.

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